Welcome to the May edition of FAQs and RAQs!

Here we tackle client questions—some asked Frequently, others Rarely.

FAQ: Will high gas prices derail the economic recovery and bull market?

We don’t think so, provided gasoline prices don’t rise to extreme levels.

While many Americans will feel the pinch of higher gas prices, it’s important to remember that economic growth is largely driven by higher-income consumers. These households account for a disproportionate share of spending and, in our view, are better positioned to absorb higher costs at the pump without meaningfully changing their behavior.

Below is a look at the estimated wealth of households across regions, which highlights just how influential the high-end American consumer is in driving overall economic activity.

Eye-opening, isn’t it?

Household wealth (USD, trillions):

All Americans: $167.1

Sources: Forbes; Federal Reserve of New York

RAQ: Should I invest in a municipal bond issued by a college or university?

Many colleges and universities issue debt to fund operations, and that debt often pays tax-free interest.

Should you partake?

Short answer: It depends. Price matters. Credit quality matters. College and university bonds often offer higher yields than traditional municipal debt because they’re perceived to be riskier.

We’re generally cautious.

The reason is demographics. Fewer Americans are set to turn 18 in the years ahead. Births peaked just before the 2008 financial crisis, and those students are now in college. Birth rates then fell sharply, hitting a record low in 2020. That leaves colleges competing for a shrinking pool of students, which could mean financial strain.

In fact, by some estimates, more than 700 colleges and universities have closed since 2013.

Municipal bond investors are aware of this, and some have already pulled back from higher education debt. But that can create selective opportunities in situations where the market may be throwing out the baby with the bathwater.

Examples might include:

• Schools with strong endowments

• Bonds with shorter maturities (e.g., under 5 years), before demographic pressures fully hit

Bottom line: We’re generally cautious on higher education debt will selectively invest when the risk/reward looks compelling.

Have a question?

Drop us a line at carlsongroup@rwbaird.com. We’d love to hear from you!

All investments carry risk, including loss of principal. Past performance is not a guarantee of future results.